Mafatlal Centre, 10th Floor, Nariman Point, Mumbai - 400 021 CIN: U65991MH1996PTC100444 Tel.: 91-22 66578000 Fax: 91-22 66578181 January 31, 2018 Dear Unit Holder, Sub: Change in Fundamental Attributes of DSP BlackRock Focus 25 Fund ('Scheme') Thank you for investing in DSP BlackRock Mutual Fund. We appreciate your trust in us. Scheme is an open ended equity growth scheme of DSP BlackRock Mutual Fund ('Fund'). Securities and Exchange Board of India ('SEBI') vide its Circular no. SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017 read alongwith Circular no. SEBI/HO/IMD/DF3/CIR/P/ 2017/126 dated December 4, 2017 (Circular) has issued directions for Categorization and Rationalization of all the Mutual Fund Schemes in order to bring about uniformity in the practice across Mutual Funds and to standardize the scheme categories and characteristics of each category. In this regard, in order to standardize our schemes in line with the categories as prescribed by SEBI in the said circular, certain changes needs to be carried out in the features of the Scheme. Such changes shall result in change in the fundamental attribute of the Scheme, which will attract compliance of Regulation 18 (15A) of the SEBI (Mutual Fund) Regulations, 1996 (MF Regulations) read alongwith Circular. DSP BlackRock Trustee Company Pvt. Ltd., Trustee to the Fund, has approved the following changes to the existing features/provisions of the Scheme: Sr. No. Particulars Existing Proposed 1. Name of Scheme DSP BlackRock Focus 25 Fund DSP BlackRock Focus Fund 2. Type of Scheme An Open ended equity growth Scheme An open ended equity scheme investing in maximum 30 stocks. Scheme shall focus on multi cap stocks. 3. Product Labeling This open ended equity growth Scheme is suitable for investor who are seeking* Long-term capital growth with exposure limited to a maximum of 25 stocks from an investment universe of top 200 compa nies by market capitalization This open ended equity Scheme is suitable for investor who are seeking* Long-term capital growth with exposure limited to a maximum of 30 stocks from a multi cap investment universe Investment in equity and equity-related securities to form a concentrated portfolio RISKOMETER Investment in equity and equity-related securities to form a concentrated portfolio RISKOMETER * Investors should consult their financial advisers if in doubt about whether the Scheme is suitable for them. 4. Investment Objective *Investors should consult their financial advisers if in doubt about whether the Scheme is suitable for them. primary investment objective of the primary investment objective of the Scheme is to generate long-term capital growth from a portfolio Scheme is to generate long-term capital growth of equity and equity-related securities including equity derivatives. portfolio will consist of multi cap from a portfolio of equity and equity-related companies by market capitalisation. Scheme will hold equity and equity-related securities including securities including equity derivatives. equity derivatives, of upto 30 companies. Scheme may also invest in debt and money market portfolio will largely consist of companies, which securities, for defensive considerations and/or for managing liquidity requirements. re is no are amongst the top 200 companies by market assurance that the investment objective of the Scheme will be realized. capitalisation. portfolio will limit exposure to companies beyond the top 200 companies by market capitalization upto 20% of the net asset value. Scheme will normally hold equity and equity-related securities including equity derivatives, of upto 25 companies. Further, the Scheme will also have at least 95% of the invested amount (excluding investments in debt securities, money market Page 1 of 24
securities and cash and cash equivalents) across the top 25 holdings in the portfolio. Scheme may also invest in debt and money market securities, for defensive considerations and/or for managing liquidity requirements. re is no assurance that the investment objective of the Scheme will be realized. 5. Asset Allocation Under normal circumstances, it is anticipated that the asset allocation of the Scheme shall be as follows: Instruments Indicative Allocations (% of total assets) Minimum Maximum Risk Profile 1(a) Equity and equity related securities, which 65% 100% High are amongst the top 200 companies by market capitalization* 1(b) Equity and equity related securities, which are beyond the top 200 0% 20% High companies by market capitalization of 1 (a) & 1 (b) above, investments in ADRs, 0% 25% High GDRs and foreign securities 2. Debt securities, money 0% 35% Low to market securities Medium and cash & cash equivalents * portfolio will largely consist of companies, which are amongst the top 200 companies by market capitalisation. portfolio will limit exposure to companies beyond the top 200 companies by market capitalization to 20% of the net asset value. Scheme will also have at least 95% of the invested amount (excluding investments in debt securities, money market securities and cash & cash equivalents) across the top 25 holdings in the portfolio. Total gross derivative exposure, investment in equity and equity related securities and investment in debt and money market securities in the Scheme shall not exceed 100% of the net assets of the Scheme. However, security wise hedge position will not be considered in calculating the above exposure. Stock lending Subject to SEBI (MF) Regulations and the applicable guidelines issued by SEBI, the Mutual Fund may engage in stock lending. AMC shall comply with all reporting Under normal circumstances, it is anticipated that the asset allocation of the Scheme shall be as follows: Instruments Indicative Allocations (% of total assets) Minimum Maximum Risk Profile Equity & equity related instruments 65% 100% High Debt and Money Market Securities* 0% 35% Low to Medium Units issued by REITs & InvITs 0% 10% Medium to High *Debt and money market instruments will include investments in securitised debt. Scheme shall limit the number of stocks to 30. scheme shall focus on multi cap stocks. Scheme retains the flexibility to invest across all the securities in the debt and money markets as permitted by SEBI / RBI from time to time, including schemes of mutual funds. Stock lending Subject to SEBI (MF) Regulations and the applicable guidelines issued by SEBI, the Mutual Fund may engage in stock lending. AMC shall comply with all reporting requirements and the Trustee shall carry out periodic review as required by SEBI guidelines. Stock lending means the lending of stock to another person or entity for a fixed period of time, at a negotiated compensation. securities lent will be returned by the borrower on expiry of the stipulated period. Investment Manager will apply the following limits, should it desire to engage in Stock Lending: 1. Not more 20% of the net assets of a Scheme can generally be deployed in Stock Lending. 2. Not more 5% of the net assets of a Scheme can generally be deployed in Stock Lending to any single counter party. Overseas Investments Under normal circumstances the Schemes shall not have an exposure of more 25% of its net assets in foreign assets/securities, subject to applicable regulatory limits. Trading in Derivatives net derivative position in the Scheme may be upto 50% of the net assets, subject to applicable regulatory limits, as mentioned in, "Where will the Scheme Invest?". cumulative gross exposure through equity, debt, money market instruments and derivative positions shall not exceed 100% of the net assets of the Scheme. Pending deployment of funds of the Scheme, the AMC may invest funds of the Scheme in short-term deposits of scheduled commercial banks, subject to the following conditions issued by SEBI vide its circular SEBI/IMD/CIR No. 1/91171 /07 dated April 16, 2007: 1. term 'short term' for parking of funds shall be treated as a period not exceeding 91 days. 2. Such deposits shall be held in the name of the Scheme. 3. Scheme shall not park more 15% of its net assets in the short term deposit(s) of all the scheduled commercial banks put together. However, it may be raised to 20% with the prior approval of the Trustee. Also, parking of funds in short term deposits of associate and sponsor scheduled commercial banks together shall not exceed 20% of total deployment by the Mutual Fund in short term deposits. 4. Scheme shall not park more 10% of its net assets in short term deposit(s) with any one scheduled commercial bank including its subsidiaries. 5. Trustee shall ensure that the funds of the Scheme are not parked in the short term deposits of a bank which has invested in that Scheme. 6. AMC will not charge any investment management and advisory fees for parking of funds in short term deposits of scheduled commercial banks. Page 2 of 24
requirements and the Trustee shall carry out periodic review as required by SEBI guidelines. Stock lending means the lending of stock to another person or entity for a fixed period of time, at a negotiated compensation. securities lent will be returned by the borrower on expiry of the stipulated period. Investment Manager will apply the following limits, should it desire to engage in Stock Lending: 1. Not more 20% of the net assets of a Scheme can generally be deployed in Stock Lending. above provisions do not apply to term deposits placed as margins for trading in cash and derivative market. Scheme shall rebalance the portfolio in case of any deviation to the asset allocation. Such rebalancing shall be done within 30 days from the date of occurrence of deviation. Where the portfolio is not rebalanced within 30 Days, justification for the same shall be placed before the Investment Committee and reasons for the same shall be recorded in writing. Investment committee shall then decide on the course of action. However, at all times the portfolio will adhere to the overall investment objectives of the Schemes. Any alteration in the investment pattern will be for a short term on defensive considerations; the intention being at all times to protect the interests of the Unit Holders. It may be noted that no prior intimation/indication will be given to investors when the composition/asset allocation pattern under the Scheme undergoes changes within the permitted band as indicated above. 6. Where will the Scheme invest? 2. Not more 5% of the net assets of a Scheme can generally be deployed in Stock Lending to any single counter party. Overseas Investments Under normal circumstances the Schemes shall not have an exposure of more 25% of its net assets in foreign assets/securities, subject to applicable regulatory limits. Trading in Derivatives net derivative position in the Scheme may be upto 50% of the net assets, subject to applicable regulatory limits, as mentioned in, "Where will the Scheme Invest?". In the event of any deviations below the minimum limits or beyond the maximum limits, a review and rebalancing of the asset allocation will be called for by the Fund Manager within 30 days from the date of the said deviation. Such changes in the investment pattern will be for a short term and for defensive considerations and the intention being at all times to seek to protect the interests of the Unit Holders. Under normal market conditions, approximately 90% of the portfolio of the Scheme will be invested in equity and equity related securities. Under normal market conditions, approximately 10% of the portfolio of the Scheme will be invested in debt securities and money market securities. This component of the portfolio will provide the necessary liquidity to meet redemption needs and other liquidity requirements of the Scheme. Equity related securities means and includes convertible/ optionally convertible/compulsory convertible debentures, convertible/optionally convertible/ compulsory convertible preference shares, share warrants and any other securities which has equity component embedded in it. Debt securities include, but are not limited to, nonconvertible debentures, zero coupon securities, non convertible portion of convertible debentures, floating rate bonds, debt instruments, and any other such instruments as may be permitted by RBI/SEBI/ such other Regulatory Authority from time to time. Subject to the Regulations and the disclosures as made under the section "How the Scheme will allocate its Assets", the corpus of the Scheme can be invested in any (but not exclusively) of the following securities: 1. Equity and equity related securities 2. Equity Related Instruments, being securities which give the holder of the security right to receive Equity Shares on pre agreed terms. It includes convertible/optionally convertible/compulsorily convertible preference shares, share warrants and any other security which has equity component embedded in it 3. Equity Derivatives, which are financial instruments, generally traded on the stock exchange, the price of which is directly dependent upon (i.e., "derived from") the value of equity shares or equity indices. Derivatives involve the trading of rights or obligations based on the underlying, but do not directly transfer property 4. Securities created and issued by the Central and State Governments and/or repos/reverse repos in such Government Securities as may be permitted by RBI (including but not limited to coupon bearing bonds, zero coupon bonds and treasury bills); 5. Securities guaranteed by the Central and State Governments (including but not limited to coupon bearing bonds, zero coupon bonds and treasury bills); 6. Fixed Income Securities of domestic Government agencies and statutory bodies, which may or may not carry a Central/State Government guarantee; 7. Corporate debt (of both public and private sector undertakings); Page 3 of 24
Money market instruments include, but are not limited to, treasury bills, commercial paper of public sector undertakings and private sector corporate entities, fixed deposits with scheduled commercial banks, certificates of deposit of scheduled commercial banks and development financial institutions, bills of exchange/promissory notes of public sector and private sector corporate entities (coaccepted by banks), government securities with unexpired maturity of one year or less, repurchase and reverse repurchase obligations as per the guidelines and regulations applicable in this regard from time to time and other money market securities as may be permitted by SEBI/ RBI from time to time. From time to time, it is possible that the Fund Manager may decide to invest a higher proportion in debt and money market securities, depending on prevailing economic and market conditions and the need to adopt a defensive posture on the portfolio of the Scheme. Debt and money market securities include, but are not limited to: Debt obligations of the Government of India, state and local governments, government agencies, statutory bodies, public sector undertakings, scheduled commercial banks, non- banking finance companies, development financial institutions, supranational financial institutions, corporate entities and trusts (securitised debt) Pass through, Pay through or other Participation Certificates, representing interest in a pool of assets including receivables non-convertible part of convertible securities Units of Mutual funds as may be permitted by regulations Structured Notes Any other like instruments as may be permitted by RBI/SEBI from time to time. From time to time, it is possible that the Investment Manager may decide to invest a higher proportion in debt and money market securities, depending on prevailing economic and market conditions and the need to adopt a defensive posture on the portfolio of the Scheme. securities mentioned in, "Where will the Scheme invest?", could be listed, unlisted, privately placed, secured, unsecured, rated or unrated (subject to the rating or equivalency requirements discussed above) and of any maturity. securities may be acquired through secondary market operations, primary issues/offerings, other public offers, Private Placement and negotiated deals amongst other mechanisms. 8. Money market instruments as permitted by SEBI/RBI; 9. Usance bills; 10. Securitised Debt; 11. non-convertible part of convertible securities; 12. Any other domestic fixed income securities as permitted by SEBI/ RBI from time to time. 13. Derivative instruments like Interest Rate Swaps, Forward Rate Agreements, Interest Rate Derivatives and such other derivative instruments permitted by SEBI/RBI. 14. Investment in units of Real Estate Investment Trust ('REIT') & Infrastructure Investment Trust ('InvIT') Debt and money market securities include, but are not limited to: Debt obligations of the Government of India, state and local governments, government agencies, statutory bodies, public sector undertakings, scheduled commercial banks, non-banking finance companies, development financial institutions, supranational financial institutions, corporate entities and trusts (securitised debt) Pass through, Pay through or other Participation Certificates, representing interest in a pool of assets including receivables non-convertible part of convertible securities Units of Mutual funds as may be permitted by regulations Any other like instruments as may be permitted by RBI/SEBI/such other Regulatory Authority from time to time. securities mentioned in, "Where will the Scheme(s) invest?", could be listed, unlisted, privately placed, secured, unsecured, rated or unrated (subject to the rating or equivalency requirements discussed above) and of any maturity. securities may be acquired through secondary market operations, primary issues/offerings, other public offers, Private Placement and negotiated deals amongst other mechanisms. Scheme may invest in other Schemes managed by the AMC or in the Schemes of any other Mutual Fund(s), provided such investment is in conformity to the investment objectives of the Scheme and in terms of the prevailing Regulations. As per the Regulations, no investment management fees will be charged for such investments and the aggregate inter-scheme investment made by all Schemes of the Mutual Fund or in the Scheme under the management of other asset management companies shall not exceed 5% of the net asset value of the Mutual Fund. Investment in Short-Term Deposits Pending deployment of the funds of the Scheme, the AMC may invest funds of the Scheme in short term deposits of scheduled commercial banks, subject to following conditions issued by SEBI vide its circular SEBI/IMD/CIR No. 1/ 91171 /07 dated April 16, 2007: (a) Each Scheme shall not park more 15% of its net assets in the short term deposit(s) of all the scheduled commercial banks put together. However, it may be raised to 20% with the prior approval of the Trustee. Also, parking of funds in short term deposits of associate and sponsor scheduled commercial banks together shall not exceed 20% of total deployment by the Mutual Fund in short term deposits. (b) Each Scheme shall not park more 10% of its net assets in short term deposit(s) with any one scheduled commercial bank including its subsidiaries. (c) Trustee shall ensure that the funds of each Scheme are not parked in the short term deposits of a bank which has invested in that Scheme. (d) AMC will not charge any investment management and advisory fees for parking of funds in short term deposits of scheduled commercial banks. (e) term 'short term' for parking of funds shall be treated as a period not exceeding 91 days. (f) Such deposits shall be held in the name of the Scheme. Investment in domestic Securitized Debt: Depending upon the Investment Manager's views, the Scheme may invest in domestic securitized debt such as ABS or MBS. investments in domestic securitized debt will be made only after giving Page 4 of 24
Collateralized Borrowing and Lending Obligations (CBLO): Collateralized Borrowing and Lending Obligations (CBLO) is a money market instrument that enables entities to borrow and lend against sovereign security. maturity ranges from 1 day to 90 days and can also be made available upto 1 year. Central Government securities including T-bills are eligible securities that can be used as for borrowing through CBLO. Repos: Repo (Repurchase Agreement) or Reverse Repo is a transaction in which two parties agree to sell and purchase the same security with an agreement to purchase or sell the same security at a mutually decided future date and price. transaction results in ized borrowing or lending of funds. Investment in Short-Term Deposits Pending deployment of the funds of the Scheme, the AMC may invest funds of the Scheme in short term deposits of scheduled commercial banks, subject to following conditions issued by SEBI vide its circular SEBI/IMD/CIR No. 1/ 91171 / 07 dated April 16, 2007: due consideration to factors such as but not limited to the securitization structure, quality of underlying receivables, credentials of the servicing agent, level of credit enhancement, liquidity factor, returns provided by the securitized paper vis-a-vis other comparable investment alternatives. Although the returns provided by securitized debt could be higher, one must not lose sight of the fact that risks also exist with regard to investments in securitized debt. Investments in pass-through certificates of a securitization transaction represent an undivided beneficial interest in the underlying receivables and do not represent an obligation of either the issuer or the seller, or the parent of the seller, or any affiliate of the seller or the issuer or the trustee in its personal capacity, save to the extent of credit enhancement to be provided by the credit enhancer. trust's principal asset will be the pool of underlying receivables. ability of the trust to meet its obligations will be dependent on the receipt and transfer to the designated account of collections made by the servicing agent from the pool, the amount available in the cash account, and any other amounts received by the trust pursuant to the terms of the transaction documents. However, the credit enhancement stipulated in a securitization transaction represents a limited loss cover only. Delinquencies and credit losses may cause depletion of the amount available under the cash account and thereby the scheduled payouts to the investors may get affected if the amount available in the cash account is not enough to cover the shortfall. Further Unit holders are requested to refer below the disclosure relating to investments in securitized debt, in the SEBI prescribed format: (i) How the risk profile of securitized debt fits into the risk appetite of the Scheme: Scheme seeks to generate an attractive return, consistent with prudent risk, from a portfolio which is substantially constituted of quality debt securities. Scheme also seeks to generate capital appreciation by investing a smaller portion of its corpus in equity and equity related securities of issuers domiciled in India. In line with the investment objective, securitised debt instruments having a high credit quality commensurate with other debt instruments in the portfolio will be considered for investment. (ii) Policy relating to originators based on nature of originator, track record, NPAs, losses in earlier securitized debt, etc parameters used to evaluate originators are (a) (b) (c) (d) (e) (f) Each Scheme shall not park more 15% of its net assets in the short term deposit(s) of all the scheduled commercial banks put together. However, it may be raised to 20% with the prior approval of the Trustee. Also, parking of funds in short term deposits of associate and sponsor scheduled commercial banks together shall not exceed 20% of total deployment by the Mutual Fund in short term deposits. Each Scheme shall not park more 10% of its net assets in short term deposit(s) with any one scheduled commercial bank including its subsidiaries. Trustee shall ensure that the funds of each Scheme are not parked in the short term deposits of a bank which has invested in that Scheme. AMC will not charge any investment management and advisory fees for parking of funds in short term deposits of scheduled commercial banks. term 'short term' for parking of funds shall be treated as a period not exceeding 91 days. Such deposits shall be held in the name of the Scheme. Track record Willingness to pay, through credit enhancement facilities etc. Ability to pay Business risk assessment, wherein following factors are considered: - Outlook for the economy (domestic and global) - Outlook for the - Company specific factors In addition a detailed review and assessment of rating rationale is done including interactions with the originator as well as rating agency. Critical Evaluation Parameters (for pool loan) regarding the originator / underlying issuer: Default track record/ frequent alteration of redemption conditions / covenants High leverage ratios of the ultimate borrower - both on a standalone basis as well on a consolidated level/ group level Higher proportion of re-schedulement of underlying assets of the pool or loan, as the case may be Higher proportion of overdue assets of the pool or the underlying loan, as the case may be Poor reputation in market Insufficient track record of servicing of the pool or the loan, as the case may be. (iii) Risk mitigation strategies for investments with each kind of originator Analysis of originator: An independent Risk and Quantitative Analysis (RQA) team analyses and evaluates each originator and sets up limits specifying both the maximum quantum and maximum tenor for investments and investments are considered only within these limits. Originator analysis typically encompasses: Size and reach of the originator Page 5 of 24
Investment in domestic Securitized Debt: Collection process, infrastructure and follow-up mechanism Depending upon the Investment Manager's views, the Scheme may invest in domestic securitized debt such as ABS or MBS. investments in domestic securitized debt will be made only after giving due consideration to factors such as but not limited to the securitization structure, quality of underlying receivables, credentials of the servicing agent, level of credit enhancement, liquidity factor, returns provided by the securitized paper visa-vis other comparable investment alternatives. (iv) Quality of MIS Credit enhancement for different type of originator level of diversification with respect to the underlying assets, and risk mitigation measures for less diversified investments Eligible assets: Only assets with an established track record of low delinquencies and high credit quality over several business cycles will be considered for investment. Analysis of pool: Characteristics such as pool maturity (in months), loan to value ratio, seasoning of the pool, maximum single exposure, geographical distribution and single exposure are studied to determine pool quality Although the returns provided by securitized debt could be higher, one must not lose sight of the fact that risks also exist with regard to investments in securitized debt. Investments in pass-through certificates of a securitization transaction represent an undivided beneficial interest in the underlying receivables and do not represent an obligation of either the issuer or the seller, or the parent of the seller, or any affiliate of the seller or the issuer or the trustee in its personal capacity, save to the extent of credit enhancement to be provided by the credit enhancer. trust's principal asset will be the pool of underlying receivables. ability of the trust to meet its obligations will be dependent on the receipt and transfer to the designated account of collections made by the servicing agent from the pool, the amount available in the cash account, and any other amounts received by the trust pursuant to the terms of the transaction documents. However, the credit enhancement stipulated in a securitization transaction represents a limited loss cover only. Delinquencies and credit losses may cause depletion of the amount available under the cash account and thereby the scheduled payouts to the investors may get affected if the amount available in the cash account is not enough to cover the shortfall. Risk mitigating measures: Credit enhancement facilities (including cash, guarantees, excess interest spread, subordinate tranches), liquidity facilities and payment structure are studied in relation to historical collection and default behavior of the asset class to ensure adequacy of credit enhancement in a stress scenario. (v) Minimum retention period of the debt by originator prior to securitization We will follow the guidelines on minimum holding period requirements as laid down by SEBI and RBI from time to time. (vi) Minimum retention percentage by originator of debts to be securitized We will follow the guidelines on minimum holding period requirements as laid down by SEBI and RBI from time to time. (vii) mechanism to tackle conflict of interest when the Mutual Fund invests in securitized debt of an originator and the originator in turn makes investments in that particular Scheme of the Fund AMC has an independent RQA team which is distinct from the Sales function and the Investments function and has a separate reporting and appraisal structure designed to avoid conflict of interest. Investments can be initiated by the fund managers only after the RQA team has assigned limits for the originator. originator wise limits specify both the maximum quantum and maximum tenor for investments. (viii) resources and mechanism of individual risk assessment with the AMC for monitoring investment in securitized debt AMC has a rigorous risk management process for all fixed income investments, which also encompasses securitized debt. A dedicated RQA team is responsible for monitoring risks including credit and liquidity risk. functions of the RQA team include: Detailed credit analysis of issuers: based on the management evaluation, operating strength and financial strength to determine suitability for investment. Periodic reviews on a quarterly/ annual basis are under taken for eligible issuers. Ratings are monitored on a daily basis and any changes are immediately recorded and suitable action taken. Further Unit holders are requested to refer below the disclosure relating to investments in securitized debt, in the SEBI prescribed format: RQA team monitors adherence to single and group level exposure norms, minimum rating requirements, liquidity requirements, and ensures that only eligible securities are included in the fund, in line with the Scheme information document/internal templates. (i) How the risk profile of securitized debt fits into the risk appetite of the Scheme: Scheme seeks to generate an attractive return, consistent with prudent risk, from a portfolio which is substantially constituted of quality debt securities. Scheme also seeks to generate capital appreciation by investing a smaller portion of its corpus in equity and equity related securities of issuers domiciled in India. In line with the investment objective, securitised debt instruments having a high credit quality commensurate with other For securitized pool loan exposures, the analysis includes pool seasoning, pool asset quality, diversification, margin, originator analysis and credit enhancement mechanisms. Pool performance statistics published by rating agencies are analyzed for performance of other securitised pools of the same originator as well as for the performance of the asset class as a whole. Regular interactions with the rating agencies are done to discuss performance trends. Documents are vetted by the legal and compliance team. In addition, monthly payout reports from the trustees are analysed for collection performance and adequacy of cash. Page 6 of 24
debt instruments in the portfolio will be considered for investment. (ii) Policy relating to originators based on nature of originator, track record, NPAs, losses in earlier securitized debt, etc parameters used to evaluate originators are Track record Willingness to pay, through credit enhancement facilities etc. Ability to pay Business risk assessment, wherein following factors are considered: - Outlook for the economy (domestic and global) - Outlook for the - Company specific factors In addition a detailed review and assessment of rating rationale is done including interactions with the originator as well as rating agency. Critical Evaluation Parameters (for pool loan) regarding the originator / underlying issuer: Default track record/ frequent alteration of redemption conditions / covenants High leverage ratios of the ultimate borrower - both on a standalone basis as well on a consolidated level/ group level Higher proportion of re-schedulement of underlying assets of the pool or loan, as the case may be Higher proportion of overdue assets of the pool or the underlying loan, as the case may be Poor reputation in market Insufficient track record of servicing of the pool or the loan, as the case may be. (iii) Risk mitigation strategies for investments with each kind of originator Analysis of originator: An independent Risk and Quantitative Analysis (RQA) team analyses and evaluates each originator and sets up limits specifying both the maximum quantum and maximum tenor for investments and investments are considered only within these limits. Originator analysis typically encompasses: Framework that is applied while evaluating investment decision relating to a pool securitization transaction: Characteristics / Type of Pool Approximate Average maturity (in Months) Collateral margin (including cash, guarantees, excess interest spread, subordinate tranche) Average Loan to Value Ratio Average seasoning of the Pool Maximum single exposure range Average single exposure range % Mortgage Loan In line with maturity of mortgage loans as per Typically less 10 years. margin will be adequate for the pool to achieve a rating in the high safety category at the time of initial rating. margin will ensure at least a 3 times cover over historical losses observed in the asset class. In line with Loan to Value ratio of mortgage loans as per Typically less 80 per cent. In line with norms and guidelines laid down by RBI/SEBI from time to time. Typically, more 3 months Commercial Vehicle and Construction Equipment In line with maturity of Commercial Vehicle and Construction Equipment loans as per Typically less 4 years. margin will be adequate for the pool to achieve a rating in the high safety category at the time of initial rating. margin will ensure at least a 3 times cover over historical losses observed in the asset class. In line with Loan to Value ratio of Commercial Vehicle and Construction Equipment loans as per Typically less 85 per cent. In line with norms and guidelines laid down by RBI/SEBI from time to time. Typically, more 3 months CAR 2 wheelers Others In line with maturity of car loans as per Typically less 4 years. margin will be adequate for the pool to achieve a rating in the high safety category at the time of initial rating. margin will ensure at least a 3 times cover over historical losses observed in the asset class. In line with Loan to Value ratio of car loans as per Typically less 85 per cent. In line with norms and guidelines laid down by RBI/SEBI from time to time. Typically, more 3 months Not more 10% Not more 10% Not more 10% Not more 10% Not more 10% Not more 10% In line with maturity of two-wheeler loans as per Typically less 4 years. margin will be adequate for the pool to achieve a rating in the high safety category at the time of initial rating. margin will ensure at least a 3 times cover over historical losses observed in the asset class. In line with Loan to Value ratio of two-wheeler loans as per Typically less 85 per cent. In line with norms and guidelines laid down by RBI/SEBI from time to time. Typically, more 3 months Not more 10% Not more 10% In line with maturity of the asset class as per margin will be adequate for the pool to achieve a rating in the high safety category at the time of initial rating. margin will ensure at least a 3 times cover over historical losses observed in the asset class. In line with Loan to Value ratio of the asset class loans as per In line with norms and guidelines laid down by RBI/SEBI from time to time. Not more 10% Not more 10% * Kindly note that all references to single loan securitization has been removed as securitization of single corporate loans are no longer envisaged under revised RBI guidelines on securitization Scheme will not be investing in foreign securitised debt. Investment in Overseas Financial Assets/Foreign Securities According to SEBI circular no. SEBI/IMD/CIR No. 7/104753/07 dated September 26, 2007 mutual funds can invest in ADRs/GDRs/other specified foreign securities and as per SEBI circular no. SEBI/IMD/CIR No. 2/122577/08 dated April 08, 2008, such investments are subject to an overall limit of US$ 7 bn. for all mutual funds put together. Mutual Fund has been allowed an individual limit of US$ 600 mn. overall ceiling for investment in overseas ETFs that invest in securities is US$ 1 billion subject to a maximum of US$ 50 million per mutual fund. Size and reach of the originator Collection process, infrastructure and follow-up mechanism dedicated fund manager appointed for making overseas investments by the Mutual Fund will be in accordance with the applicable requirements of SEBI. Depending upon the Investment Manager's views, Scheme would like to seek investment opportunities in the ADR/GDR/overseas market. Page 7 of 24
(iv) Quality of MIS Credit enhancement for different type of originator level of diversification with respect to the underlying assets, and risk mitigation measures for less diversified investments Eligible assets: Only assets with an established track record of low delinquencies and high credit quality over several business cycles will be considered for investment. Trading in Derivatives Mutual Fund may use various derivatives and hedging products/ techniques, in order to seek to generate better returns for the Scheme. Derivatives are financial contracts of pre-determined fixed duration, whose values are derived from the value of an underlying primary financial instrument, commodity or index. Scheme while investing in equities shall transact in exchange traded equity derivatives only and these instruments may take the form of Index Futures, Index Options, Futures and Options on individual equities/securities and such other derivative instruments as may be appropriate and permitted under the SEBI Regulations and guidelines from time to time. Advantages of Trading in Derivatives Advantages of derivatives are many. use of derivatives provides flexibility to the Schemes to hedge whole or part of the portfolio. following section describes some of the more common derivatives transactions along with their benefits: Analysis of pool: Characteristics such as pool maturity (in months), loan to value ratio, seasoning of the pool, maximum single exposure, geographical distribution and single exposure are studied to determine pool quality Risk mitigating measures: Credit enhancement facilities (including cash, guarantees, excess interest spread, subordinate tranches), liquidity facilities and payment structure are studied in relation to historical collection and default behavior of the asset class to ensure adequacy of credit enhancement in a stress scenario. (v) Minimum retention period of the debt by originator prior to securitization We will follow the guidelines on minimum holding period requirements as laid down by SEBI and RBI from time to time. (vi) Minimum retention percentage by originator of debts to be securitized We will follow the guidelines on minimum holding period requirements as laid down by SEBI and RBI from time to time. (vii) mechanism to tackle conflict of interest when the Mutual Fund invests in securitized debt of an originator and the originator in turn makes investments in that particular Scheme of the Fund AMC has an independent RQA team which is distinct from the Sales function and the Investments function and has a separate reporting and appraisal structure designed to avoid conflict of interest. Investments can be initiated by the fund managers only after the RQA team has assigned limits for the originator. originator wise limits specify both the maximum quantum and maximum tenor for investments. Derivatives are financial contracts of pre-determined fixed duration, whose values are derived from the value of an underlying primary financial instrument, commodity or index, such as interest rates, exchange rates, commodities and equities. 1. Futures A futures contract is a standardized contract between two parties where one of the parties commits to sell, and the other to buy, a stipulated quantity of a security at an agreed price on or before a given date in future. Currently, futures contracts have a maximum expiration cycle of 3 months. Three contracts are available for trading, with 1 month, 2 months and 3 months expiry respectively. A new contract is introduced on the next trading day following the expiry of the relevant monthly contract. Futures contracts typically expire on the last Thursday of the month. For example a contract with the April 2017 expiration expires on the last Thursday of April 2017 (April 27, 2017). Basic Structure of an Index Future Stock Index futures are instruments designed to give exposure to the equity markets indices. Stock Exchange, Mumbai (BSE) and National Stock Exchange (NSE) have trading in index futures of 1, 2 and 3 month maturities. pricing of an index future is the function of the underlying index and short-term interest rates. Index futures are cash settled, there is no delivery of the underlying stocks. Example using hypothetical figures: 1 month ABC Index Future If the Scheme buys 2,000 futures contracts, each contract value is 50 times the futures index price. Purchase Date : April 01, 2017 Spot Index : 9200.00 Future Price : 9300.00 Date of Expiry : April 27, 2017 Margin : 10% Assuming the exchange imposes a total margin of 10%, the Investment Manager will be required to provide a total margin of approx. Rs. 93,000,000 (i.e. 10%*9300*2000*50) through eligible securities and cash. Assuming on the date of expiry, i.e. April 27, 2017, ABC Index closes at 9350, the net impact will be a profit of Rs. 5,000,000 for the Scheme, i.e. (9350-9300) * 2000 * 50 (Futures price = Closing spot price = Rs. 9350.00) Profits for the Scheme = (9350-9300) * 2000*50 = Rs. 5,000,000. Please note that the above example is given for illustration purposes only. Some assumptions have been made for the sake of simplicity. net impact for the Scheme will be in terms of the difference of the closing price of the index and cost price. Thus, it is clear from the above example that the profit or loss for the Scheme will be the difference between the closing price (which can be higher or lower the purchase price) and the purchase price. risks associated with index futures are similar to those Page 8 of 24
(viii) resources and mechanism of individual risk assessment with the AMC for monitoring investment in securitized debt AMC has a rigorous risk management process for all fixed income investments, which also encompasses securitized debt. A dedicated RQA team is responsible for monitoring risks including credit and liquidity risk. functions of the RQA team include: Detailed credit analysis of issuers: based on the management evaluation, operating strength and financial strength to determine suitability for investment. Periodic reviews on a quarterly/annual basis are under taken for eligible issuers. Ratings are monitored on a daily basis and any changes are immediately recorded and suitable action taken. RQA team monitors adherence to single and group level exposure norms, minimum rating requirements, liquidity requirements, and ensures that only eligible securities are included in the fund, in line with the Scheme information document/ internal templates. For securitized pool loan exposures, the analysis includes pool seasoning, pool asset quality, diversification, margin, originator analysis and credit enhancement mechanisms. Pool performance statistics published by rating agencies are analyzed for performance of other securitised pools of the same originator as well as for the performance of the asset class as a whole. Regular interactions with the rating agencies are done to discuss performance trends. Documents are vetted by the legal and compliance team. In addition, monthly payout reports from the trustees are analysed for collection performance and adequacy of cash. associated with equity investments. Additional risks could be on account of illiquidity and potential mis-pricing of the futures. Basic Structure of a Stock Future A futures contract on a stock gives its owner the right and obligation to buy or sell stocks. Single Stock Futures traded on NSE (National Stock Exchange) are cash settled; there is no delivery of the underlying stocks on the expiration date. A purchase or sale of futures on a security gives the trader essentially the same price exposure as a purchase or sale of the security itself. In this regard, trading stock futures is no different from trading the security itself. Example using hypothetical figures: Scheme holds shares of XYZ Ltd., the current price of which is Rs. 500 per share. Scheme sells one month futures on the shares of XYZ Ltd. at the rate of Rs. 540. If the price of the stock falls, the Mutual Fund will suffer losses on the stock position held. However, in such a scenario, there will be a profit on the short futures position. At the end of the period, the price of the stock falls to Rs. 450 and this fall in the price of the stock results in a fall in the price of futures to Rs. 470. re will be a loss of Rs. 50 per share (Rs. 500 - Rs. 450) on the holding of the stock, which will be offset by the profits of Rs. 70 (Rs. 540 - Rs. 470) made on the short futures position. Please note that the above example is given for illustration purposes only. Some assumptions have been made for the sake of simplicity. Certain factors like margins and other related costs have been ignored. risks associated with stock futures are similar to those associated with equity investments. Additional risks could be on account of illiquidity and potential mis-pricing of the futures. 2. Options An option gives a person the right but not an obligation to buy or sell something. An option is a contract between two parties wherein the buyer receives a privilege for which he pays a fee (premium) and the seller accepts an obligation for which he receives a fee. premium is the price negotiated and set when the option is bought or sold. A person who buys an option is said to be long in the option. A person who sells (or writes) an option is said to be short in the option. An option contract may be of two kinds: 1) Call option An option that provides the buyer the right to buy is a call option. buyer of the call option can call upon the seller of the option and buy from him the underlying asset at the agreed price. seller of the option has to fulfill the obligation upon exercise of the option. 2) Put option right to sell is called a put option. Here, the buyer of the option can exercise his right to sell the underlying asset to the seller of the option at the agreed price. Option contracts are classified into two styles: (a) European Style In a European option, the holder of the option can only exercise his right on the date of expiration only. (b) American Style In an American option, the holder can exercise his right anytime between the purchase date and the expiration date. Basic Structure of an Equity Option In India, options contracts on indices are European style and cash settled whereas, option contracts on individual securities are American style and cash settled. Example using hypothetical figures: Market type : N Instrument Type : OPTSTK Underlying : XYZ Ltd. (XYZ) Purchase date : April 1, 2017 Expiry date : April 27, 2017 Page 9 of 24
Framework that is applied while evaluating investment decision relating to a pool securitization transaction: Characteristics / Type of Pool Others Approximate Average maturity (in Months) Collateral margin (including cash, guarantees, excess interest spread, subordinate tranche) Mortgage Loan In line with maturity of mortgage loans as per Typically less 10 years. margin will be adequate for the pool to achieve a rating in the high safety category at the time of initial rating. margin will ensure at least a 3 times cover over historical losses observed in the asset class. Commercial Vehicle and Construction Equipment In line with maturity of Commercial Vehicle and Construction Equipment loans as per Typically less 4 years. margin will be adequate for the pool to achieve a rating in the high safety category at the time of initial rating. margin will ensure at least a 3 times cover over historical losses observed in the asset class. CAR 2 whe ele rs In line with maturity of car loans as per Typically less 4 years. margin will be adequate for the pool to achieve a rating in the high safety category at the time of initial rating. margin will ensure at least a 3 times cover over historical losses observed in the asset class. In line with maturity of twowheeler loans as per Typically less 4 years. margin will be adequate for the pool to achieve a rating in the high safety category at the time of initial rating. margin will ensure at least a 3 times cover over historical losses observed in the asset class. In line with maturity of the asset class as per margin will be adequate for the pool to achieve a rating in the high safety category at the time of initial rating. margin will ensure at least a 3 times cover over historical losses observed in the asset class. Option Type : Put Option (Purchased) Strike Price : Rs. 9,750.00 Spot Price : Rs. 9,800.00 Premium : Rs. 200.00 Lot Size : 100 No. of Contracts : 50 Say, the Mutual Fund purchases on April 1, 2017, 1 month Put Options on XYZ Ltd. (XYZ) on the NSE i.e. put options on 5000 shares (50 contracts of 100 shares each) of XYZ. As these are American style options, they can be exercised on or before the exercise date i.e. April 27, 2017. If the share price of XYZ Ltd. falls to Rs. 9,500/- on April 27, 2017, and the Investment Manager decides to exercise the option, the net impact will be as Follows: Premium Expense = Rs. 200 * 50 * 100 = Rs. 10,00,000/- Option Exercised at = Rs. 9,500/- Profits for the Mutual Fund = (9,750.00-9,500.00) * 50 * 100 = Rs. 12,50,000/- Net Profit = Rs. 12,50,000 - Rs. 10,00,000 = Rs. 2,50,000/- In the above example, the Investment Manager hedged the market risk on 5000 shares of XYZ Ltd. by purchasing put options. Please note that the above example is given for illustration purposes only. Some assumptions have been made for the sake of simplicity. Certain factors like margins have been ignored. purchase of Put Options does not increase the market risk in the Mutual Fund as the risk is already in the Mutual Fund's portfolio on account of the underlying asset position (in his example shares of XYZ Ltd.). Premium paid for the option is treated as an expense and added to the holding cost of the relevant security. Additional risks could be on account of illiquidity and potential mis-pricing of the options. Exposure to Equity Derivatives i. Position limit for the Mutual Fund in index options contracts: a. Mutual Fund position limit in all index options contracts on a particular underlying index shall be Rs. 500 crore or 15% of the total open interest in the market in index options, whichever is higher, per Stock Exchange. b. This limit would be applicable on open positions in all options contracts on a particular underlying index. ii. Position limit for the Mutual Fund in index futures contracts: a. Mutual Fund position limit in all index futures contracts on a particular underlying index shall be Rs. 500 crore or 15% of the total open interest in the market in index futures, whichever is higher, per Stock Exchange. b. This limit would be applicable on open positions in all futures contracts on a particular underlying index. iii. Additional position limit for hedging: In addition to the position limits at point (i) and (ii) above, Fund may take exposure in equity index derivatives subject to the following limits: a. Short positions in index derivatives (short futures, short calls and long puts) shall not exceed (in notional value) the Mutual Fund's holding of stocks. b. Long positions in index derivatives (long futures, long calls and short puts) shall not exceed (in notional value) the Mutual Fund's holding of cash, government securities, T-Bills and similar instruments. iv. Position limit for the Mutual Fund for stock based derivative contracts: combined futures and options position limit shall be 20% of the applicable Market Wide Position Limit (MWPL). v. Position limit for the Scheme: position limits for the Scheme and disclosure requirements are as follows: Page 10 of 24